“Our great start to 2014 continued with a second consecutive quarter of revenue, operating income and pro forma EPS growth. We are excited to see the positive consumer reception for many of our recently introduced products and are maintaining our focus on innovation and diversification to drive further growth opportunities,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “Given the strong start to the year, we are raising our revenue and EPS guidance for full year 2014 to $2.75 - $2.85 billion of revenue and $2.95 - $3.05 of pro forma EPS.”
Outdoor:
The outdoor segment posted a slight revenue decline compared to the strong performance we achieved in the second quarter of 2013. Gross and operating margins contracted compared to the prior year due primarily to inventory reserves and advertising expenses associated with our VIRB™ action camera. We further expanded our broad portfolio of outdoor products with the introduction of the Approach™ S6. The Approach S6 for the golf enthusiast delivers one-of-a-kind swing metrics in a wristwatch. Metrics include swing tempo and swing strength paired with a tempo training feature.
Fitness:
The fitness segment posted revenue growth of 79% in the quarter on the strength of vívofit™, our first activity tracker, and recent biking and running product introductions including the Edge® 1000 and the Forerunner® 15, 220 and 620. Gross margins were steady at 65% year-over-year while operating margins improved to 42% as sales growth significantly outpaced operating expense growth. While much has been said about these markets being crowded, we are committed to exploration, development and delivery of innovation that customers desire across our broad range of fitness and wellness products. With this commitment, we believe we can maintain our leadership and deliver ongoing revenue growth in this segment.
Aviation:
The aviation segment posted revenue growth of 11% in the quarter driven by increased OEM sales. The gross and operating margins in aviation were strong at 74% and 29%, respectively. During the quarter, we were pleased to see the final certification and first delivery of the Cessna Citation X+ featuring our touchscreen G5000 integrated flight deck. During the back half of 2014, we will have additional certifications with the G3000 in the updated CJ3+ and Alpine Edition CJ2+. In addition, we continue to focus efforts on numerous certifications that will begin to contribute revenue in 2015 and beyond including the Cessna Latitude, which achieved first flight in February 2014 and is slated for final certification in 2015, as well as the Bell 525 and 505, which are scheduled for first flight this year.
Marine:
The marine segment posted revenue growth of 1% compared to the strong performance we achieved in the second quarter of 2013. While revenue growth was tempered, gross margin improvement and reduced operating expenses drove 23% growth in operating income. Gross margin improvement was driven by product mix shifting toward new products with higher margin profiles. In the quarter, we announced the acquisition of Fusion Electronics, a marine audio equipment supplier. This acquisition will allow us to offer a broader portfolio of marine products as we leverage Fusion’s advanced audio equipment capabilities.
Auto/Mobile:
The automotive/mobile segment posted revenue growth of 2% as PND sales continued to decline but were offset by amortization of previously deferred revenue and growing OEM revenues. Gross and operating margins in the quarter were 48% and 21%, respectively, representing an improvement over the prior year primarily due to the amortization of high margin deferred revenue. The PND market has performed better than expected but we remain cautious regarding the industry and will continue to focus on share gains and profitability.
Additional Financial Information:
Total operating expenses in the quarter were $226 million, a 6% increase from the prior year. Research and development investment increased 2%, while declining as a percentage of sales, driven by fitness and outdoor growth to support new product initiatives. Advertising increased 18% as we launched campaigns to support new products in outdoor and fitness. Selling, general and administrative expense increased by 5% but declined as a percentage of sales in the quarter.
The effective tax rate in the second quarter of 2014 was 12.8% compared to 16.5% in the prior year due to a favorable income mix across tax jurisdictions partially offset by the expiration of certain Taiwan tax holidays and the expiration of the federal research and development credit.
In the second quarter, we generated $143 million of free cash flow (see
attached table for reconciliation of this non-GAAP measure). We
continued to return cash to shareholders with our quarterly dividend of
approximately $88 million and our share repurchase activity which
totaled $129 million in the current quarter. We have $79 million
remaining in the share repurchase program authorized through December
31, 2014. We ended the quarter with cash and marketable securities of
over $2.8 billion.
